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Thursday, 10 September 2009

Supervising Islamic Finance

Riyadh, Asharq Al-Awsat-Since its emergence, Islamic banking has never been subjected to any kind of independent supervision with the exception of supervising itself and that of [Islamic] Shariaa bodies that observe its activities and the tools and products of Islamic banking and its institutions.

The supervisory bodies that oversee financial corporations, such as central banks, market authorities and the bodies supervising insurance have paid no attention to this, either because they want to avoid double standards or because they are unaware of the importance of a supervisory body and of the need for standards to govern such an industry and its institutions. Those who passed laws with regards to this industry did not activate them, and they were more like ineffective instructions rather than laws.

This is because those in charge of supervisory bodies were unaware of the substantial and perhaps radical differences between the Islamic banking industry and conventional banking. Most of these people were conventional bankers who had no previous experience in the field of Islamic banking. Moreover, they had no incentive to learn, as they were in strong positions in the sense that they were the ones to enact, and at the same time, supervise the laws. They alone can solve or further complicate matters.

In addition, Islamic banking was not as wide spread as it is today and people were not forced to deal with it. However, as the influence of this industry has increased recently and has expanded so much that it has become a dominating feature of some financial institutions and their products in some countries, it will force the officials in charge of supervisory bodies to review their positions and to strive towards learning about the secrets of this industry and towards studying it carefully so that they can supervise it more effectively.

As some Asian and Western cities, London in particular, seek to attract the finances of Islamic banking and its institutions in order to become the financial capital of this industry, the Islamic banking industry took on an international dimension after having been immersed in localism.

After the emergence and intensification of the global financial crisis and after the Western world in particular realised that the Islamic banking system and its institutions could help the world out of the crisis, several systematic and advanced markets opened up to this industry. Such markets do not allow any kind of activity unless proper laws are enacted and proper mechanisms of supervision are ensured so as to guarantee risk control and good management. These countries have sought to pass laws that are suitable to the characteristics of such an industry and to create an effective supervisory system to monitor it.

With the risks of this industry being brought to light, such as the risks entailed in the settlement of Sukuk and the fact that several financing operations of some struggling companies are Islamic finances, this still gives rise to disputes between banks, these companies, Sukuk bearers and issuers. Due to the lack of clear rules and specialized courts necessary for this industry, there is no doubt that such disputes would be prolonged, which would affect the interests of the parties involved, especially banks and Sukuk bearers who would be highly affected by any delay in judgment and in obtaining their rights in such cases.

All these combined elements are now putting pressure on the founding Islamic countries to deal with the Islamic banking industry in a different manner so that this industry is acknowledged, proper laws are enacted, effective supervisory bodies are formed for risk control, accounting policies are legislated to ensure proper transparency and so that a fair judicial system is set up to preserve and give people their rights in the quickest and easiest way possible. This will make Islamic banking and its institutions a significant source of development for these countries and also a factor of financial strength after having been marginalized for a long time by the supervisory bodies in these countries, causing the finances in these countries to head towards other advanced markets that can guarantee a sound legal environment. As a result, these countries were deprived of that industry’s finances that would have contributed to the development of these countries by making the appropriate finance available for the infrastructure of these countries and contributing to financing the private sector and creating suitable job opportunities for their people.

Providing the appropriate supervision of any industry is enough to protect it and ensure its development and the Islamic banking industry is in dire need of supervision to protect it against itself and to ensure its development.